could i urge my right angle friends -- it is a symbol that says would respect the sacrifice that people have made on behalf of the country. >> i will certainly do as my honorable friend says that i think it's not just an issue of riding to fifa but it's also asking fifa's membership bodies including the fa to take a very strong line about this but as he says, this is not an issue of left or right or labour or conservative. we all wear the poppies with pride. we all do it, even if we don't approve of the worst people are fighting in. we do it to honor the fact that these people sacrifice their lives for us. it's absolutely vital for fifa to understand that. and i think a clear message going out from this government can make them think again. >> thank you, mr. speaker. building on the last answer the prime minister gave, given the fact that italy is down and incredible fiscal path, with the

assist the find -- the prime minister's to upgrade the european -- [inaudible] in such a way that helps the eurozone? >> the honorable gentleman makes an important point but what i would say is the first responsibility for building this bailout fund has got to be with the eurozone members but i think the problem of the chi 20 as we discussed in this house on monday is you can't ask that you 20 and the imf and countries like britain to do things that the eurozone members are not themselves prepared to do. we do stand ready to boost the imf. we do want to the countries in distress. we don't want to see our trading partners collapse. we understand even though we don't support members of the year, countries falling out could be very painful for our economy. but it is for the is an countries but it is their currency. they have to sort out the problem.

[inaudible] wiki assess that what we really need is structure and negotiate for trees given the impact having on the united kingdom? and to use a analogy which you will be aware of, he would not -- he will be sent in with a new vet and a united conservative team behind him. >> well -- [shouting] there's a long history, there's a long history of my part of cricketing and europe in the unhappily. so i think i won't necessarily follow him down that path that what i would say is we will defend the national interest. when it was a treaty change in the european council we got something back for britain which was to get out of the e.u. bailout fund. it to our future treaty changes, and some european countries are pushing for them. we will make sure we do a good deal for britain and protect our national interest.

>> order, order. i remind the house despite, although the house is not sitting on that day, many of us will be on the state performed our poetry duty to do at 11:00 on friday, we should join the nation so we might remember those who gave their lives for their country to help to preserve our democratic freedoms. instructions will be issued to heads of house of departments so that those members who wish to observe silence may do so. order. statement from foreign secreta secretary. >> we will leave the british house of commons now as they move on to other legislative business. you've been watching prime minister's question time aired live wednesdays at 7 a.m. eastern while parliament is in session. you can see this weeks question time and again sunday night at nine eastern and pacific on

c-span. for more information go to c-span.org and click on c-span series for prime minister's questions, plus links to international news me and legislatures around the world. you can watch recent video including programs dealing with other international issues. >> in a few moments a hearing on counterfeit electronic making their way into the pentagon supply chain.

>> found 1800 cases of counterfeit electronics in the pentagon supply chain. parts mostly from china but also the united kingdom. this portion of the hearing is to ours. we were showed as much as we can enter the senate comes back into session. >> good morning, everybody. today's hearing is a product of the armed services committee ongoing investigation into counterfeit electronic parts in the department of defense, dvd supply chain. you will probably hold at least one additional hearing to discuss what the department is

doing to keep counterfeit electronic parts out of defense systems. we have three panels of witnesses today so i expect that the hearing may continue into the afternoon. and i also expect that we will break for lunch and this will all be determined by how long these first two panels take. we also have a vote scheduled i understand for 1215 thymic which also could affect that decision. i want to thank senator mccain for his efforts in this investigation. i want to thank our staffs, investigative staffs for their very, very hard work. the systems that we rely on for national security and the protection of our military men and women depend on the performance and reliability of small highly sophisticated electronic components. our fighter pilots rely on night vision systems, enabled by transistors to identify targets.

our troops depend on radios and gps devices, microelectronics that make them work. to stay in contact with their units, to get advanced warning of threats that may be just around the next corner. the failure of a single electronic part can leave them vulnerable of the worst possible time. the flood counterfeit electronic parts has made it a lot harder to have confidence. that won't happen. in some industries, the turn counterfeit suggests an unauthorized fake, a knockoff of an original product. the definition of counterfeit as relates to electronic parts which has been endorsed by the department of defense and defense contractors alike, includes both fakes and previously used parts that are made to look new and are sold as new.

in march of this year we announced an armed services committee investigation into counterfeit parts of dod supply chain. during the course of the committee's investigation virtually everyone of the dozens of people, investigators have spoken with from defense contractors to semiconductor manufacturers to electronic component brokers, everyone of them has pointed to china, to specifically a city in guangdong province as the primary source and counterfeit electronic parts. while this hearing is focused many on the national security implications of counterfeit electronic parts, the rabbit that the u.s. intellectual property by chinese counterfeit, counterfeiters, also severely impacts our economic security. according to the semiconductor industry association, sia, u.s. semiconductor manufacturers

employ nearly 200,000 american workers. counterfeiting which those jobs at risk and robs us of american jobs yet to be created. the sia estimates that counterfeiting costs u.s. semiconductor manufacturers, seven and a half billion dollars a year in lost revenue, and can cost u.s. workers nearly 11,000 jobs. this spring we attempted to send armed services committee staff to mainland china to get a firsthand look at the counterfeiting industry. i wrote the chinese ambassador of the message informing him that the trip was part of the committees official duties. shortly after my letter, an official of the chinese in this he told committee staff that if the results of the investigation were not positive, it could be damaging to the u.s.-china relationship. that's exactly backwards. what is damaging to u.s.-china

relations is china's refusal to act against brazing counterfeiting that is openly carried out in china. in june we sent our staff to hong kong where visa is not required and the staff again sought entry into mainland china. but appeals on our behalf through our most senior democrats in hong kong and beijing fell on deaf ears and our staff was refused entry. that refusal only highlights the chinese government's total lack of transparency and unwillingness to act to stem the tide of dangerous counterfeits produced in china that are swamping the market. looking at just a slice of the defense contracting universe, committee staff asked a number of large defense contractors, and some of the testing companies to identify cases in which they had found suspected counterfeit parts over a two-year period. they reported 1800 cases

covering a total of 1 million individual parts. of those 1800 cases, we selected about 100 to track backwards through the supply chain. so where did the trails ultimately lead? the overwhelming majority, more than 70%, led to china. and with few exceptions, the rest came from no resale points, resale points for parts that came from china. counterfeit parts from china all too often end up in critical defense systems in the united states. china must shut down the counterfeiters that operate with impunity in their country. if china will not act promptly and we should treat all the electronic parts from china as suspect counterfeits. that would mean requiring inspections at our ports of all

shipments of chinese electronic parts and to ensure that they are legitimate. the cost of these inspections would be borne by shippers, as it is the case of the other types of border inspection. i want to describe now how these candidates are made and why they are so dangerous. much of the material used to make counterfeit electronic parts is electronic waste, and the waste, shipped from the united states to the rest of the world to china. the waste is shipped in two chinese cities where it is disassembled by hand, sometimes washed in dirty river water and dried on city sidewalks. once have been watched parts may be sanded down to remove the existing part number and other marks on the part that indicates its quality or performance. in a process known as black

topping. the tops of the parts may be recoded to hide standing marks. state-of-the-art printing equipment is used to put false markings on the parts, showing them to be new or of higher quality, faster speed or able to withstand more extreme temperatures than those for which they were originally manufactured. when the process is complete, parts are made to look brand-new to the naked eye. once they have been shipped through the counterfeiting process, -- on second once they have been through the counterfeiting process, the parts are packaged and shipped to other cities to be sold in the markets or to be sold on the internet. one of our witnesses today, has described to the committee quote, whole factories set up in china just the counterfeiting. counterfeit electronic parts are

sold openly from shops and chinese markets. this morning we will hear from richard hillman of the u.s. government accountability office, gao, about just how pervasive the presence of china-based counterfeiters is online. mr. hillman will share the preliminary results of the investigative work that we asked him to undertake. gao's stunning results, not only point directly to china as the source of the counterfeiting problem, they showed just how far the counterfeiters are willing to go for money. gao investigator went out to buy electronic parts that go into defense systems, and found that not only would companies supply counterfeit parts when the gao sought legitimate parts,

suppliers also sold gao investigators, acting undercover, parts that had nonexistent part numbers. part numbers that were made up from whole cloth by committee staff. all of those, nonexistent numbers were in china. i'm going to go through very quickly a presentation of how one of these counterfeit parts made its way through the defense supply chain. ..

alerting the navy that electronic parts suspected to be counterfeit had been installed on three electromagnetic interference filters installed on clear units delivered by raytheon who only became aware of the suspect counterfeit after being alerted by a committee investigation. according to the navy the failure of an electromagnetic interference filter caused it to fail. the navy also told the committee and s. h. 6 tb could not -- involving 05 missiles without a reliable, functioning for a

year. one of them was sent to the uss grimly in the pacific. how did a suspect counterfeit part end up in a night vision and targeting system intended for a navy helicopter in the pacific fleet? these filters were sold to raytheon by company called texas spectrum of electronics. this is the map we are showing about the path of these counterfeit parts. that is a defense subcontractor in texas. those three fleers contain transistors texas spectrum bought in 2010 from a company called technology conservation group. pc is both an electronics recycling company and electronics distributor. the transistor's issued in among

72 pounds of miscellaneous excess inventory that a massachusetts company called thomson broadcast sent to pc gee as, quote, descrap. the part arrived in what appeared to be the original package. pc diesel the transistors as new and unused parts. where did thompson broadcasting get the parts? they bought them from a company called ewarehousing california. they bought them from pivotal elektra next electronics distributor in the u.k.. we asked to the where they bought them and their answer was you ig a electronics ltd. in china. the c 27 day is a military

aircraft used for tactical support and to support combat operations. the u.s. air force ordered 38 c 27 js bleep 11 of which have been delivered. two are currently deployed now in afghanistan. the c 27 jenne is equipped with display units that provide the pilot with information on the health of the airplane including engine status, fuel use legal locating and warning messages. the display units are provided by a 03 display systems, division of 03 communications manufactured for alenia aeronautics, a subcontractor of 03 integrated systems. another division of the 03 communications and the military's prime contractor for the c 27 j. november of 2010 after a part

failed on a field aircraft and internal testing toll-free display system discovered that a memory chip used on its display unit was counterfeit. the display systems that have already been installed on more than 500 of its display units including those intended for the c 27 day as well as the air force's c 130 j. and c-17 aircraft and the c h 46 use by the marines. failure of the memory chip caused a display unit to show as a degraded image, lose data or even go blank altogether. belfry integrated systems, prime contractor to the air force did not notify its customer, the air force that the c 27 j.s were affected by the part until september of 2011, nearly a year after it had been discovered. where did these counterfeit

chips come from? supply chain is somewhat shorter but started off in the same place. the display systems bought apart from global i see trading group, electronics distributor in california which bought the chips from electronic trade company in china. that is not the end of it. in total the committee discovered that hong are supplied 28,000 electronic parts and divisions within l3 communications and 13,000 of those parts have already been identified as suspects counterfeit. neither the committee nor 03 communications knows whether remaining 14,000 parts are authentic. the company has not identified what military system they might be in. another example. the p 88 poseidon, boeing 737

airplane modified to incorporate anti-submarine and anti surface warfare capability. 3 p 88 aircraft currently are in test at naval air station and the navy intends to purchase 108 of the aircraft from boeing. on august 17th, 2011, boeing said the message mark, quote, priority critical. wiki 8 program office. the message said and ice detection module installed on one of the test aircraft contained a, quote, reworked part that should not have been put on the airplane originally. should be replaced immediately. the part at issue is critical to the functioning of the p 8 police detention -- detection module. boeing first identified a problem with the part in december of 2009 when an ice

detection module failed on the company's flight line. in that case, the part had literally fallen out of its socket and was found runaround inside the module of the airplane. b 8 e-systems which manufactures ice detection system for boeing investigated the failure. they discovered that the part had fallen out of the stock in dozens of other parts from the same line. were not new parts at all. raptors they were previously used parts, counterfeited to make them appear new. on closer inspection it discovered the parts had likely been sanded down and remarked. the lead on many parts were bent and markings on the parts were inconsistent. parts that should have been virtually identical to one another were found to be of different sizes. in january of 2010, p a e notified boeing of suspect

counterfeit parts on up the eighth calling the coveted part, quote, unacceptable for use and recommending they be replaced. engineers believed their use created a long term reliability risk but it took boeing more than a year and a half to notify the navy or its other customers about the suspect counterfeit parts. those notifications only came after our committee asked about them. why it took so long for bowing to notify its customer is something which we will discuss with mr. debundo who is a witness on our third panel. the navy recently said the government's position in any cut the fed material received is not conforming material, it should be immediately reported. where did the counterfeit parts

come from in that case? p a e purchase 300 of the parts from a company called can desk text labs in california. it but apart from a company called abacuses technologies in florida. abacus purchase the parts from an affiliate of a actress electronics in china and wired payment for the parts to a bank in shin sang, china. three cases that just described are drop in the bucket. there is a flood of counterfeit putting our military men at risk and costing us a fortune. one example, in september of 2010, missile defense agency learned mission computers for that missiles, suspect other than memory devices.

according to the missile defense agency if the devices had failed the missile itself would likely have failed. the cost of that fix was nearly $2.7 million. who paid for it? the american taxpayer. meet we must change acquisition rules to shorty cost, suspect counterfeit parts is paid by the contractor, not the taxpayer. know ifs -- ands or buts. regardless of the type of contract involved. let's be clear. the risk is not created by the contractor. the risk stems from the brazen action of the counterfeiter. mr. kameth said what keeps this up at night is the dynamic

nature of this threat. because the time we figured out how to test for these counterfeits they figured out how to get around it. some of -- even if the counter fit is not identified right away and contractors testing process will weed out counterfeit parts, if the system containing a counterfeit parts passes that testing, they argue, then the counterfeit parts should work just like a new part but that is not what the manufacturers of these parts tell us. it is also not what our military leaders tell us. we wrote to a large semiconductor manufacturer about the anomalies da e identified on the counterfeit parts intended for a raise detection. the parts were counterfeits of or original filings devices. these cases pose a significant

reliability risk. some of these could be catastrophic. the devices may initially function, it may be next to impossible to predict what amount of life is remaining or what damage may have been caused to the circuitry. in those cases when dod or contractor in the defense industry needs a spare electronic part to fix a 10 or 20-year-old system there is a good chance that part may no longer be available from its original manufacturer and there may be little place but to go to the open market to find the replacement. the parts that we buy are still supposed to be new even if they are no longer being manufactured. too few contractors and distributors consistently file reports with government industry

data exchange program. the dod system that provides a forum for industry and government to report suspected counterfeit parts to the suppliers who sold them. that has got to change too. failing to report suspected counterfeit and suspect suppliers put everybody at risk and even make sure our regulations require contractors who discovered, and the military system to report that discovery to the military right away. you will hear from three panels of witnesses. the first panel is three witnesses, brian toomey is president of the association, tom sharp is vice president of s m t corp. independent distributor of electronic components as well as vice president of its affiliated test lab liberty component services.

mr richard hillman, managing director of investigative service u.s. government accountability office, gee a o. mr. hillman is accompanied by the chief scientist mr. timothy person. the witness on our second panel is lieutenant general patrick o'reilly. general o'reilly is director of the missile defense agency. our final panel is three witnesses. mr. kameth from raytheon and mr. ralph nino of corporate procurement of 0 free communications and charles bu o bundo, poseidon program manager of boeing defense based security systems. we appreciate the attendance of our witnesses. this is an important point. all of the companies and

agencies represented here today have cooperated with the committee's investigation. we in the industry and our troops and families are all on the same side of this battle. the only people who benefit from counterfeit are people who are making money off of those counterfeits. we have to end that. we have to end the attitude -- the chinese will not cooperate in this investigation or act against counterfeiters. we wrote to chinese ambassador last week inviting him to send a representative to testify today but he declined. again with my thanks, senator mccain. >> thank the witnesses for being here. we are talking about an issue that is a risk to national security. these counterfeit electronic parts in our supply chain results in reduced reliability

and availability and frankly our ability to defend this nation's national security interests. as the chairman pointed out most of the electronic material is stalin electronically -- shipped from the u.s. and other countries to china where old computers and other electronic products are disassembled by hand. there is an article in business week magazine entitled dangerous fakes which i would like to quote from. it says much of that pollution, n/a obtain supplies from emporiums suggests bull you electronic market outside shanghai in southeastern china.

the garbage strewn streets read a burning plastic. and open yards strip chips from old pc circuit boards. components less than an inch long are cleaned -- and sold businesses from the trade center. and assigned for advertisers in chinese that it sells, quote, military circuitry, and more durable than commercial component able to function and extreme temperatures. proprietor loo long admits his are counterfeit. his employees and off the markings on commercials chips and relabel them as military. everyone does this, he says. the dates on the chips are 100% fake because the products of a

computer boards are from the 80s and 90s while customers demand products from after -- but this is a serious issue. the chinese government doesn't stop it, it continues to pose a national security risk. there are other problems associated with that. the chairman outlined defense contractors, independent distributors or brokers that they have access, obsolete parts. there is risk i hope the witness

will explore in obtaining parts and simply conduits with a phone and a desk for some of these parts and the chairman outlined various layers in places that these parts go through. we have to address that side of the issue. we all want small-business people to be able to obtain dod contracts but not the kind of abuse that apparently also is practiced here. on want to thank you for the hours of long hard work and are look forward to hearing from the witnesses. >> thank you, senator mccain. let us start with mr. sharp. ordinarily we would call on the g a o witness first but today we

will start with a vivid description of the problem and mr. hillman, you can give us a gao investigation that you undertook. we will start with mr. sharp. >> mr. chairman, senator mccain and members of this committee i want to thank you for allowing me to provide this testimony. the issues with counterfeit parts in the department of defense is a big problem, in big focus of our job. my company's job is to authenticate, source and supply parts to the aerospace industry. we take this seriously. unexplained to you what exactly are saw when i was in the city of shenzhen and the counterfeits that were seen out there today. in july of 2008 i had an

opportunity when traveling into the city of hong kong on business to go into the nearby city of shenyang. the reason i went in was to visit the marketplace that has been mentioned here on the screen. i had an interpreter go with me. we walked through the marketplace for the day and while i was touring the marketplace, the interpreter told me that the marketplace district was the largest in the world of its kind. 30% to 40% of all parts sold here were counterfeit. many of the boosts that we pass were owned by counterfeiters who brought the product into the marketplace to still. the local brokers and manufacturers shop here openly to receive these 7% cost savings on buying parts that are counterfeit as opposed to buying random parts.

knowing full well over at the fallout on these parts is up to 15% will not work. product sold to brokers outside china represented to be new and news that the time they are sold into the united states and elsewhere. also most of the component counterfeiting was performed in shan tall. i never heard of that prior to going to pensions and so this was new to me. we travelled to chanterelle and toward this kerri and we visited businesses that were known to the driver that was with us. while there eyewitnessed piled outside buildings throughout large areas of the town and the outskirts of the town used electronic parts being washed in a river and laid on the riverbank to draw. harvested components being dumped on the sidewalk sorted by women and children laid out for the monsoon rains of july to

watch them naturally. cardboard and plastic bins filled with expensive brand-name components and harvested from scrap of circuit boards. lost my place. ready for processing. the actual cutter food-processing components actually taking place while i was there within some of the buildings. a wide variety of counterfeit parts for sale within the counterfeiting facilities. materials that come from most manufacturers we know of for sales and overall a huge infrastructure of similar or supporting businesses in and around shan tall for harvesting components and processing into counterfeit electronic parts. interesting to note that counterfeiting perform their when speaking to the people there was not regarded as theft or wrong in any way whatsoever.

it was seen more as a positive initiative for the repurchasing and reuse of perfectly good use product. in the past several years they identified documented several new counterfeit processes specifically designed to evade the current inspection processes known to be in use by industries at the time. these include a new service coating material that is immune to acetone surface permanency tests that has a surface that looks just like manufacturers -- released this to dod and prime contractors in august of 2009 and without requiring surface coatings released this to dod in june of 2011. and a process to remove and condition the top surfaces of ceramic components was released

just yesterday to dod prime contractors and others. counterfeiters are most certainly monitoring our level of detection expertise and quickly evolving newer processes to introduce into the global supply chains many of the current counterfeit techniques that are already beyond the in house capabilities of most open market suppliers. over the last several years the defense and aerospace industry made progress labor foundational groundwork for effective counterfeited plan. we hope to see the fruits of this labor in 2012. lastly i personally believe the work of this committee was playing a significant role in the industry transformation needed to effectively mitigate the, if it threat within the department of defense. thank you. >> thank you very much. your entire statement if you did not give it was made part of the record and that will be true of all the statements of our

witnesses because in some cases they are reducing the length of that statement for time purposes. mr. hillman? >> ranking member mccain and members of the committee. thank you for the opportunity to discuss the preliminary observation of our ongoing investigation into the availability of counterfeit parts on the internet rating platforms. counterfeit parts have the potential to seriously disrupt department of defense supply chain affecting integrity of the system and ultimately endanger the safety of our military personnel. this committee cited concerns about the availability of counterfeit parts on internet platforms and asked us to purchase certain electronic parts and have their authenticity tested. i would like to briefly summarize how we are conducting this ongoing investigation and our results. in conducting this work we created a fictitious company to gain access to internet platforms that sell military

great electronic parts. power companies included a fictitious odor and employee mailing and e-mailing addresses and a listing on the central contractor registration. we attempted to purchase membership to three internet platforms that were of interest to this committee and were granted membership to two platforms. we requested quotes from vendors on both platforms to purchase a total of 13 parts from a list of parts the committee provided that fell into one of three categories. one, authentic part numbers or's the lead and repair parts. two, authentic part numbers with post production date codes or date code after the list state department manufactured and 3, bogus part numbers. we independently verified with the defense logistics agency that the authentic part numbers were used for military applications. we also confirmed and selected part manufacturers the bogus part numbers were not associated with actual part. we requested parts from vendors

that were new and original packaging, not refurbished and not with next day code. we selected the first vendor among those offering the lowest prices that provided enough information such as name, address and payment benefits to make a purchase. we then contacted with s&p corp. for component authentication analysis of the parts we receive. we are not disclosing the names of the internet trading platforms we are using and altered all part numbers in this testimony due to the ongoing nature of our investigation. regarding our preliminary results as shown in figure 1 on page 4 of my prepared statement as of today we have purchased 13 parts and none of the seven parts we have complete test results for are authentic. specifically all three parts tested after we requested legitimate brought raw air or obsolete parts failed at least

three of seven authentication analyses and suspected counterfeit. these included two voltage regulators and one operational amplifier. the failure of which could pose risks to the functioning of electronic systems where the parts reside. s&p made the same determination for another operational -- after requesting legitimate part number where they postproduction date code. in this instance the part failed four seven analyses and the vendor misrepresented the part at nine years newer than the date it was last produced. in addition we receive three bogus parts after submitting orders using invalid part numbers because no legitimate parts in the final category exist. we did not send them for authentication testing. we are also awaiting results on two additional parts and have not yet received another four purchases. we will report those -- additional parts we plan to

purchase in a future product. while we sent requests to domestic and international companies all of the parts we purchased and receive to date were provided by vendors in china. more specifically all four parts they tested were suspected counterfeit. detects -- parts were subject to authentication analyses including visual week as the mechanical, x-ray and microscopic testing. figures 2 and 3 on page 6 and 10 provide photos and detailed test results for each part. overall each was suspect counterfeit because the results of the tests indicated the parts were likely used parts that were harvested from older equipment and altered to appear as new. for example s&p corp. found some parts were found to have scratches and lead to suspect devices that had been confirmed by both visual inspection and electronic microscopic analysis. marks were also found on the

bottom of the components suggesting they were pulled from a working environment. further testing between top and bottom revealed inconsistencies in chemical composition leading them to conclude that the leads were extended with intention to deceive. microscopic inspection revealed different revision numbers of the guy and differences win markings were found in some parts even though the samples were advertised from the same part number and production date. commonly component manufacturing was the same date and lock coat with the same revision. finally the manufacturer of certain parts confirmed end of life designation leading s&p to conclude that certain parts were misrepresented as being a newer than the actual parts could possibly be. as previously stated as of today we received three bogus parts after submitting requests using invalid part numbers. the fact that vendors fulfilled our request indicates they were

willing to sell parts stamped with nonexistent part numbers essentially taking money in exchange for bogus parts. figure 4 on page 12 of my prepared statement provides photos from the fictitious parts we receive to date. in conclusion preliminary observation from our ongoing investigation indicates counterfeit electronic parts can be found on internet purchasing platforms. i will be pleased to report full results of our work once a reinvestigate is complete. i would also like to extend my appreciation to the entire investigation team for their dedication and commitment in delivering the interim report with combined assistance of investigators, analysts and methodologies we are pleased to provide investigative services to congress. chairman levitt and ranking member mccain and members of the committee, this concludes my repaired remarks and i will respond to any questions you may have. >> thank you for your investigation and for all the

other great work gao does. >> chairman 11, members of the committee, i appreciate the opportunity to testify today to aid in your investigation into account of electronic parts in the apartment of defense supply chain and the dangers counterfeit semiconductors posed the u.s. national security and public safety. the issue is of more importance as semiconductors are key components of an increasing number of mission critical civilian applications such as life-saving medical devices legal automotive safety systems peterson airplanes but more alarmingly, and semiconductors have infiltrated the tools, systems and communications equipment our military is using today. by way of brief background semiconductor is the foundation or brain of an electronic device. the popular term microelectronic integrated circuits and computer chips are synonymous with semiconductors.

our industry is america's largest exporter. semiconductor innovations form the foundation for america's $1.1 trillion technology industry that supports a workforce of six million. the semiconductor industry is a great american innovation story and our companies lead the world in the rapid pace of innovation and global market share. we consider our industry a model for the innovation economy of the future and our company builds the vast majority of advanced design and manufacturing in the u.s. and nearly 85% of our products internationally. first a note on legitimate semiconductors reverses counterfeit. are members which include the largest semiconductor companies invest billions of dollars in state of the art facilities to manufacture semiconductors in clean rooms. the highly sensitive chips are tested to ensure they function to exacting specifications of standards. in the case of military brain

chips these specific semiconductors are designed and tested to withstand intense temperature and movement variables to the performance standards necessary for combat and military situations. in contrast as the chairman and ranking member noted counterfeiters abroad rummage through piles of the waste. in some cases this includes old computers and circuit boards from the 80s and 90s in crude techniques like surface, acid watches and open flames to conceal the true origin and purpose of the chip. they already weakened from the original state at great risk of failure, are labeled sometimes of military grade using digital printing and laser package for sale to international brokers. recently counterfeiters have begun acquiring more sophisticated equipment and advanced labeling techniques making it increasingly difficult to identify fake semiconductors. our members have found factories that manufacture blank checks on with counterfeit markings are added later in a made to order

fashion. the the the ship's functionality does not match order specification. as a result more and more counterfeit chips make it through our borders into a wide range of products. given the high failure risk displaces our citizens and military personnel and unreasonable peril. a counterfeit semiconductor is a ticking time bomb. a prime example of counterfeit making their way into military supply chains is a case which recently resulted in the first felony conviction for counterfeit trafficking. account of its semiconductors sold by a vision tech included chips for naval vessel and land-based identification friend or foe systems and the system used by f-16s to track hostile radar systems. chips intended for application of the u.s. navy cobra replacement program and chips that control the braking system in high-speed trains. this is a very real and alarming

problem. american lives are at risk every time a counterfeit semiconductor makes its way into one of these highly complex and mission critical systems. experts estimate as many as 16% of all spare and replacement parts are counterfeit. overall as the chairman noted we estimate counterfeiting cost semiconductor companies more than $7.5 billion per year which translates into nearly 11,000 lost american jobs. our industry takes this a very seriously and we're committed doing everything in our power to stop counterfeit from entering the u.s. and being used in our military and civilian supply chain. we believe this is a multifaceted problem that will require a multi prong approach with a coordinated effort from government and industry. understand this is an investigative hearing but i would like to offer five steps we view as critical to combating this clear and present danger. first we should continue our

successful partnership with the dod and doj and others to develop a more robust and effective authentication system. second, dot should have strengthened procedures for mission critical components including purchasing exclusively from authorized distributors or dod certified. third we should strengthen our ability to partner with customs officials to stop counterfeit semiconductors at the border. in 2008 they stopped a successful practice of sharing key information regarding suspect counterfeit chips with manufacturers and began rejecting or crossing out critical manufacturing codes making it virtually impossible to determine if the suspect chips are counterfeit. returning to the pre 2008 practice which approved our nation's ability to stop counterfeits at our borders. we should continue to aggressively prosecute counterfeit traffickers and finally we should leverage every

trade tool at our disposal to encourage stronger enforcement of intellectual property rights especially trademarks internationally. thank you for this opportunity to testify and welcome questions. >> thank you. let's try a seven minute first round. if we need a second round we will have one. let me start with you, mr. hillman. this action or activity to try to test this market, produced released and results. the idea that you could give any part number, make up a part number, you can find somebody who will act as though they are responding to that order on the

internet is an amazing results and all coming from china's though far. that fits with what our investigation shows. china is the source of the counterfeit. when you set up to buy parts you did not specifically aimed at any particular country. you went on a global marketplace, the internet. >> we did not target any specific region but asia, europe and north america. what we look at specifically with individual parts requested by this committee. we added those numbers on these internet trading platforms. vendors offered quotations for us and we selected those among the lowest prices that had available information to allow us to make the purchase. it just so happened that the

results of our tests showed 13 purchases we made to date 12 have come from china and one from beijing. >> how much time elapsed between the time the g l a's fake company you created requested the parts with these bogus part numbers and the time you actually received the bogus parts? is that a matter of days, months or weeks? >> a matter of days. we made purchases and waited for approximately a 24-hour period, sometimes along her to obtain quotations of individuals willing to supply these part numbers. upon receiving information from the lowest priced bidders on available information with which to make payment for these purchases, it could have taken from several days to a little over a week for the purchases to

actually arrived. >> how would you pay for the parts? >> we contacted with the vendors for western union services to supply the funds for the purchase. >> they were wired transferred. did you find there were any operators, counterfeiters working more than one company? one person as far as you can tell have more than one company? was there a boiler room anywhere? >> appeared from the results of our discussions over the internet that there were individuals with similar names that were supporting multiple vendors that were willing to supply these parts. >> mr. sharpe, you do independent testing. one of the companies you are

affiliated with. when you did the testing here, did you know who you were testing that for? >> we only knew we were testing them on behalf of g-80? >> even though was on this committee? >> no, sir. >> you sell parts too. >> biggest part of our business. >> compare the way you saw part handled in china with the way you handled parts that you sell. >> there are no words to described it. washing parts literally being watched on rivers and dropped on riverbanks and dumped into cardboard boxes, there was nothing done whatsoever to protect the component at any phase of what we saw going on. if anything the entire process would serve to ruin the

components. the processes followed by s&p begin with strict the sb controlled rooms. clothing by our employees. the areas are dehumidifiers and kept between a relative humidity level between 25% to 45%. not only where we work on them but store them. all packaging is the sp compliant and tested. it is a completely different world. >> what impact in the way electronic parts are handled have on performance and reliability? >> in the case of the parts we saw in chad hall on the sidewalks or in the river for instance, one of the biggest enemies of an electronic component is oyster. there is no safeguard whatsoever

to stop moisture into the component. moisture integration into the components leads to delamination and things that become the beginning of the end. when we look at parts through an acoustical microscope we can see evidence of that moisture on parts that are counterfeit, very prevalent for us to see. >> the life span of a part is dramatically affected by the way in which they're handled. >> absolutely. >> when you were there, did there appear to be any steps taken by the chinese government to stop the marketing of these parts? the chinese tell us they act against counterfeiting. they issued a statement to the press that they always are taking action against counterfeiters. did you see any evidence when you were there of any chinese

government action against what was being sold as counterfeit? >> no, i did not. when i was in the marketplace the parts that bret baier, the interpreter was reading to me cards describing what level of refurbishment had taken place as they were regarded. this was out in the open. when we got into the city of s chsnt chsntal, the purpose of the business was to harvest components and go through complete refurbishment right there in the open. >> senator mccain? >> i think the witnesses. mr. homan, how serious do you think this problem is? >> the results of our work to

date is based on a non generalized sample of parts we requested to purchase. therefore unable to discuss the prevalence of this activity. >> a serious problem? not so serious? waste of your time? >> no, not at all. we consider the problem itself to be a very serious one, possibly affecting the military personnel's live and capabilities of the systems they utilize. >> do you agree with that assessment? >> absolutely. this is a very serious and growing problem. >> what do we need to do? >> i outlined a number of steps briefly that i think we ought to continue and expand. certainly working to strengthen the authentication procedures and working in a cooperative way

with dod officials to do this. ensuring that process continues and makes sense, insuring the procurement system is strengthened so that for these mission critical components they are only purchased through authorized distributors or certified resellers. that would be critical. >> doing that now? people are getting certified to be a reseller but obviously there is little scrutiny or examination of the people who are getting this certification. would you agree, mr. homan? >> of the internet purchasing platform we observed a wide variety of testing or lack thereof associated with the parts being made available for sale. >> we have been told by number of independent distributors in testing laboratories that more often than not semiconductor manufacturers refused to assist

in determining authenticity of an electronic part. is that your experience? >> we see that both ways. we generally try to reach out to component manufacturers to get information on front markings and things like that so we don't have data. some chains you don't get cooperation of the manufacturer. >> what do you say about that? >> are companies work closely with government officials. one -- >> you don't agree with mr. sharp's assessment? >> we work closely with government officials and corporate legal >> agree or disagree with his assessment? >> i think our industry has a record of working cooperative lee with both private-sector and government officials to authenticate chips. one of the steps i recommended was changing custom fall to allow us to cooperate because in

many cases at the border only the manufacturer can authenticate the chip and given the policy that is in place we are not allowed to do that so we do cooperate and we would like to strengthen that cooperation. >> we would like to help you in that effort. have you been involved in this issue at all? that some of the laboratories and testing distributors, people are not given assistance by the semiconductor manufacturers? >> results of our investigation have not led into that area. >> which means to you in terms of your investigation? >> in terms of our investigation we have shown it is possible to purchase counterfeit parts on internet purchasing platforms. as part of this ongoing work, delved into the potential issues that exist currently within

those platforms or cross the supply chain but hope to do additional work as part of the continuation of our work. >> mr. sharpe and others have given information that manufacturers refuse to assist. does suggest you get on that and i suggest you get on it quickly. we will be glad to consider legislative changes but manufacturers are not cooperating, it makes a problem even worse. i hope you look at these allegations, find out if they're true. if they're true or not true and get to work on it. >> thank you. how long has this been going on in your view? >> i have been in the industry for 15 years. i have spoken to folks who have been around the industry since the 60s and they've seen counterfeits going back --

>> is it growing worse or better or the same? >> much worse. the reason i call it much worse is the counterfeiters are changing their processes to get in front of the processes we're currently doing to detect the processes. it is evolving and getting harder to detect. >> it would be extremely difficult to stop this unless we get active cooperation of the chinese government. >> i would agree with that. >> there is little doubt but chinese government is aware this significant industry is taking place. >> absolutely no doubt. >> ever had a conversation or heard anything from the chinese government about this? >> i have not. >> mr. homan? >> i have not. >> mr. toohey, i admire your

members and the contributions for firsts -- for america's economy but i suggest you give this some priority so that members of this committee and the american people can be assured that there is active cooperation. >> yes, senator. >> i have read reports of the desk and the phone, the middle person who basically is a path through and part of it is because of our encouragement of small business people being able to be involved in dod procurement. how serious is that part of the problem? >> we all value of the participation by small businesses. in this instance, this investigation what we have learned, several purchases we have made, individuals posing to

the representatives of multiple companies and are willing to supply parts to us are not authentic and no part numbers exist. >> thank you, mr. chairman. >> senator udall. >> let me -- the most important things are have heard is this is a serious and growing problem. i would like to build on the comments and questions of the chairman and senator mccain. senator mccain really put his finger on here. we need a team effort, federal government and industry have to work together. i look forward to hearing results of your increased focus in this area as you acknowledged this morning. i am not here to pick on you but i do think this is something

that has gotten the attention of the committee. to my thinking there are roles the state department and customs and border patrol component manufacturers and suppliers alike can play. doesn't seem there's one solution but a number of relatively simple solutions we could provide and would in turn provide a screen to get at the heart of this. if i could, get into more detail, there is something called a trusted boundary program and it is a joint dod/and as a program that shores certified chips and processors are allowed in the supply chain. as i understand it we don't require components to be certified through the tee f d. i would like to ask the industry experts here would dare be any benefit to require an electronic components to be certified as tsb complaint before being allowed into the dod supply

chain? what a trusted supplier certification requirement protect manufacturers and dod alike and given we are spending billions on fake components, investment in such a certification program would pay for itself in a short period of time? made we could start with mr. sharpe and mr. toohey. >> i would send parts to this program to have them certified before sending them to dod. >> that is what i'm getting at. we are basically taking supplies at their word for the authenticity of the components they provide even though it seems the supplies can't always say where those ships come from but we don't know how many other systems whether they are in vehicles or the radio or, as efforts we put forward in to weapons systems themselves that

could be at risk of failure. seems we have to go the extra mile and i am searching as the committee is for ways to get at this quickly and at a cost effective manner. >> as far as the trusted boundary program goes this is a group of foundries where material can be built directly for the government with no brokers in between. this would be an area, independent distributor would not have any access as far as i know unless we were to ask them to do work for us but generally since is direct from them to you. as far as product from the independent channel we all know that due to the obsolescence that goes into or becomes part of weapons systems, lots and lots of material has to come from our industry in the independent sector. i personally believe that the way into this to mitigate it

properly is for heavy requirements testing being done by the supplier. i am talking about documented proof of all tests and i won't run through the will list. there's a lot that can be done including full electrical. this is being done and required by many that we currently deal with. >> mr. toohey. >> this is a multi bronc problem that requires multifaceted solution. in that regard part of the solution is certainly continuing the work that we are doing with dod for the authentication process and ensuring that process works and manufacturers can authenticate chips in the supply chain. the foundry program plays a role in what dod procures but that process is being re-evaluated. there are many parts of the

solution that we ought to implement in order to ensure we know which ships going to the dod supply chain. >> could i turn to the chinese government? what more can we do? what more should we be doing to encourage them to stop the flow of these fake component in the united states? i welcome any of you on the panel to comment. >> since the chinese government is aware of what is going on as far as counterfeiting it would seem to me that they could get a handle on this rather quickly if they were to make the effort to do so. since everything is out in the open, i believe china can put the right restrictions and penalties in place within their own country and stop the lot of this quickly. that is the way i would see it.

>> mr. toohey. to you have thought? >> more to be done in china to enforce -- stop counterfeiting and enforce intellectual property. our association has been working with chinese government officials at the state level and the provincial and local level for quite some time on this problem. for example part of our work was establishment of a legitimate market so that there is a legitimate way in which to procure a legitimate chips and that has been established. the chinese government during the special campaign implemented earlier this year have demonstrated when it focuses results semiconductors were not part of a special campaign on intellectual property enforcement but those industries that were involved, pharmaceutical was and others,

also indicated there's strong progress. it was encouraging, having our trade officials and bilateral -- encouraging stronger enforcement is the right way to go. >> mr. hillman, do you have any insights into this counterfeit market in china and a chinese government's roll? are they turning a blind eye or is there evidence of duplicity? >> nothing that our investigation has uncovered. we are continuing to record final results later this year. >> did your investigation determined that any of our service members have been injured or that there was loss of life tied to these counterfeit chips? >> the parts that we have purchased that are authentic fit

into a variety of significant military applications. the result of our investigation to date suggests those are on a counterfeit basis. we have not gone to the extent to determine whether counterfeit parts have actually been placed into those systems. therefore, whether or not live have been endangered. >> let me end with this, and if -- to your answer and my question. that is why the committee is so concerned. our service members face in of peril to put themselves on the line day in and day out. there is an unseen danger tied to the electronics on which we depend. this is a very serious situation. we have work to do. we will do it as a team. this committee, the private sector and the chinese government have an important role to play. thank you again for your

appearance. >> senator brown? >> i have a question i want to make sure i understand what you said. you indicated in your initial statement that we determine those products are being supplied with defective materials and not only do we pay for the product in the first go around but did you also say we are paying for the replacement and repair of those? >> depending on the contract there is evidence we will hear more about that in the second panel. the example i gave, it was a cost plus contract and unless you can prove intention that something is intentionally counterfeit with knowledge we end up paying for it. that is something we can change. >> come in on the amendment and

the co-sponsor because it only makes sense in capital held that we would do something like that. the fact that we are paying top dollar for a product and in fact we get the product and it is filled with defective components. >> we can correct it on capitol hill but the pentagon enters into it. the cost plus contract to allow and require that the pentagon pay for replacement unless you can prove the defective part was put in knowingly. >> we should have to make that proved. it should be a given that everything we pay for is the highest quality. >> that is what our amendment will do. >> you said the middleman, you describe it when you did your research and your sting operation and provided numbers that were real and in fact it came back with some fictitious product. is that your statement?

what has been done to those people? have they been let go? are you not doing business with them any more? what does it take to stop doing business with people like this in washington? >> we will be referring to the results of our investigation to the inspector general for the department of defense on further review of potential action. >> with the recommendation to many of all contact and recruits any and all payments? is that a fair statement? >> yes. >> a reason not only manufacturing in america but we know what we are getting and what the supply chain is going to rely on entities like you described for your investigation. how did you get into the country to do that when we had representatives that were denied? did you go over and want to see what they are doing and have an opportunity to buy more products? how did that work?

just curious. >> we don't buy products over there. the trip begins as a business trip to visit u.s. based customer in hong kong which turned into a vacation in beijing two weeks before the olympics in 2008. the borders were very porous. i did not know i was going to be traveling to shantal. i was then the driver and hiring someone to take me out there. there seemed to be no issues whatsoever. no one questioned me. there were areas are whistle by could not take photographs. >> i share with chairman 11 - e --levin and senator mccain that instances tripled as a result of manufacturers failing to appear to testing requirements. we think that is the reason?

>> yes. that is the reason. i agree with that. >> a lot of recommendations that you have made and mr. toohey are making will that change that? >> yes, we believe it would significantly help to strengthen the authentication procedures and strengthen procurement policies to ensure we are stopping these at our borders. to aggressively prosecute. >> and what you need in terms of legislation to get that done. are you doing that. >> we will be happy to follow up with a more detailed proposal. >> this is unbelievable. you are both pursuing -- it came out of left field.

the other thing we have to worry about. what is -- take a shot, any one of you. what is your thought about likelihood that everything that has been done is malicious. not just to make money but malicious in terms of trying to deliberately breach dod equipment and try to gain some type of tactical advantage. is there anything like that going on? or just going out to get money? just to make money? that is my first question. my second question is why not go to the source? is there a way to process this waste? do it internally? is there the ability to do this in our country and take that supply chain and cut it off? makes no sense that we're sending this over in barges and they do what they are doing and it is clear from the pictures. did anyone send this

investigation to the embassy and the ambassador and the chinese ambassador and say can you explain what is going on here? a couple questions. is there any way -- any malicious intent to lead -- deliberately breach our equipment and a different way we can do it to stop the supply chain? i can't believe one of the greatest countries in the world and one of the most innovative countries in the world obviously, we can't do more with this waste? anyone can take a shot at that. you have been silent. take a shot at one of those. >> thanks. in terms of understanding malicious intent that was out of scope of our investigation which is still going on. in terms of dealing with those

things, g-8 o has done reports on the waste and so on with that general issue. the legitimacy -- the court issued or one of the core issues has to do with who wants that to happen in their own backyard? who pays for that and that sort of thing. >> american taxpayers are paying indirectly by the fact that we are double paying for equipment and top-of-the-line first off and paid by the potential breaches in security and the way we are providing improvement to our men and women that are serving. my time is up. i appreciate. >> thank you. senator machin? >> this will probably be to mr. sharpe or mr. toohey. the know of any government

agency that makes any product that they have researched and designed and done the research and brought it to market that no other country does right now or no other company outside of china? anything you needed that they brought to market? .. >> there are examples of research.

i should add that the chinese government has singled out the semiconductor industry in their five year plan is one they want to build because they know what it means to our country. they are putting a lot of investment into developing domestic semiconductor industry. >> how many of your members have a presence in china? >> several, several large members. >> would you like for us to understand you want us to be concerned about their protection also? are they there because of the price? >> senator, there's a global market. china is actually the largest market of semiconductors globally. not a lot is produced by local companies i mentioned that they are the largest market, and address many of our international companies have presence in china. >> are we still purchasing these products as a government?

to mr. hillman or dr. persons. is a united states government or our defense department, are we still purchasing, doing business with these people? >> the parts that we have been purchasing as part of this ongoing investigation are rare, hard to find and obsolete parts that are still being utilized in major weapons systems. the internet purchasing platforms demonstrate that contractors or subcontractors that are in need of these hard to find rare, obsolete parts have an outlet through these purchasing platforms to acquire these parts. a concern though is that the intent to deceive certainly exists. >> are we still purchasing? i just asked a very simple question. is the united states government still purchasing from these counterfeiters who are putting out inferior products?